Oil hits near 3-month high on economic optimism

Oil rose to its highest level in nearly three months on Monday, topping $81 a barrel as a sharp rise on equity markets and a weak dollar raised optimism about the strength of the global economic recovery and the outlook for energy demand.

US September crude rose $2.64, more than 3 per cent, to $81.59 a barrel by 11:39 EDT (1539 GMT), the highest price since May 5.

ICE Brent rose $2.78 to $80.96, the highest level since May 13.

US stocks rallied as strong earnings results and better-than-expected manufacturing data prompted investors to build on last month's run-up.

European stock markets set the tone early, hitting a three-month high following strong results from leading banks HSBC and BNP Paribas.

The US dollar fell to a three-month low against a basket of currencies as investors moved to riskier assets, which supported oil prices. A weaker greenback makes commodities cheaper for holders of other currencies.

"With the still-weak dollar, people are more attracted to rising equity prices. That is the reason for the technical break through today," said Gene McGillian, analyst at Tradition Energy in Stamford, Connecticut.

US crude looks to have broken out of the $70-$80 a barrel range it traded in for most of the last three months, triggering further buying.

The growing optimism among speculative investors on the outlook for longer-term oil prices was evident in data from the Commodity Futures Trading Commission (CFTC) on Friday.

Money managers increased net long crude oil positions to the highest level since May on the New York Mercantile Exchange in the week to July 27, the CFTC said.

Tropical Depression 4 formed in the Central Atlantic Ocean, the US National Hurricane Center said, and that news also supported oil prices.

The hurricane season is entering what in recent years has been a period of peak activity between August and early October. Atlantic storms sometimes enter the Gulf of Mexico, posing a threat to US and Mexican oil infrastructure.

"You have Tropical Depression number four, which is not supposed to hit the Gulf of Mexico, but who knows where it might go," said Phil Flynn, analyst at PFGBest Research in Chicago.

Some analysts warned oil's rally may be short-lived if investors focus on the weak fundamental outlook following lackluster economic data.

"I don't see a reason for any more significant rise in oil prices," said Christophe Barret, oil analyst at Credit Agricole.

"Fundamentals have not improved when you look at Chinese and U.S. economic indicators they look pretty weak," Barret added.

China's official purchasing managers' index (PMI) fell to a 17-month low in July of 51.2 from 52.1 in June, the China Federation of Logistics and Purchasing (CFLP) said on Sunday.

The PMI is designed to provide a timely snapshot of business conditions and a figure above 50 indicates expansion.

On Monday, an index based on a nationwide survey of business executives conducted for HSBC showed Chinese manufacturing shrank in July for the first time since the global downturn in March 2009 on government steps to slow bank lending and fight property speculation.

Meanwhile, data on Friday showed that US gross domestic product expanded at a 2.4 percent annual rate, missing expectations for growth of 2.5 percent, after an upwardly revised 3.7 per cent growth pace in the first quarter.